he might have entered into, determines the income tax consequences under the cash receipts and disbursements method. This principle has been fundamental to the cash receipts and disbursements method for many years. It has had widespread application; it has not previously been modified by the courts or the Treasury; and it has survived Congressional reenactment of the statute. In the absence of a statutory directive to the contrary, it should continue to be applied consistently to all transactions that are subject to the cash receipts and disbursements method. As the Supreme Court observed in another context: "This Court has observed repeatedly that, while a taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice, whether contemplated or not. Higgins v. Smith, 308 U.S. 473, 477 (1940); Old Mission Portland Cement Co. v. Helvering, 293 U.S. 289, 233 (1934); Gregory v. Helvering, 293 U.S. 465, 469 (1935), and may not enjoy the benefit of some other route he might have chosen to follow but did not. To make the taxability of the transaction depend upon the determination whether there existed an alternative form which the statute did not tax would create burden and uncertainty.' Founders General Corp. v. Hoey, 300 U.S. 268, 275 (1937); Television Industries, Inc. v. Commissioner, 284 F.2d 322, 325 (CA2 1960); Interlochen Co. v. Commissioner, 232 F.2d 873, 877 (CA4 1956). See Gray v. Powell, 314 U.S. 402, 414 (1941).". Commissioner v. National Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974). The Treasury's proposed regulations would create the same kind of "burden and uncertainty" that the Supreme Court has considered objectionable. The income tax system must be based on the transactions that taxpayers actually enter into, not on the basis of speculation. In calling for a departure from this fundamental principle, the proposed regulations purport to take an action that only Congress can take. It is submitted, therefore, that if they are adopted in final form, the proposed regulations will not be valid. See Fribourg Navigation Co. v. United States, supra; Helvering v. Winmill, supra; Manhattan General Equipment Co. v. Commissioner, supra; cf. Central Illinois Public Service Co. v. United States, 46 U.S.L.W. 4163 (1973). COVINGTON & BURLING. BURLINGTON INDUSTRIES, INC., Greensboro, N.C., March 31, 1978. Hon. LLOYD BENTSEN, DEAR SENATOR BENTSEN: Proposed Treasury Regulations Section 1.61-16 was published in the Federal Register on February 3, 1978, and the public was extended the opportunity to make written comments. The Proposed Regulation relates to taxation of those amounts the payment of which is deferred under compensation reduction plans or deferred compensation arrangements. We are writing to express our opposition to the promulgation of the Proposed Regulation. Burlington Industries, Inc. is vitally interested, as are all businesses, in attracting and retaining in its employment persons of outstanding ability, competence and potential. In its continuing effort to meet this objective, the Company established an incentive compensation plan, the adoption of which was approved by its more than 30,000 stockholders on February 4, 1971. Under the terms of this plan benefits are payable five years after they are awarded in an amount to be determined on the basis of dividends on and increase in the book value of the Company's common stock during the five-year period. At the time benefits under the plan are awarded, the employee may elect to receive payment at the end of the 5-year period or to defer payment to some later date. As we interpret the Proposed Regulation, an employee who participates in the above-described plan would be taxed on benefits at the end of the five-year period whether or not he had elected to defer them. The Proposed Regulation would thus effectively remove the employee's option to defer payment of the benefits-a result which, we respectfully submit, benefits neither the Treasury, the employee nor the employer. The Proposed Regulation provides no benefit to the Treasury since no increase in, nor acceleration of, revenues will result. Deferred compensation plans involve no element of tax avoidance. The Company will deduct such benefits, and the em ployee-recipient will report them as income in the year paid. The resulting gain or loss in revenue to the Treasury is represented by the difference in the employee's tax rate and the 48 percent rate at which the Company is taxed. Generally, a decision by an employee to defer the payment of benefits under the plan described above is made as a part, and in furtherance of, his retirement planning that is, he is seeking to provide greater financial security for his retirement years. The Proposed Regulation removes a tool previously available to him for use in accomplishing that objective. The employer also loses on adoption of this Proposed Regulation since he no longer has available to him this proven means of attracting and retaining highly qualified employees. By basing the benefits of our plan on dividends and increase in book value of the Company's stock, we are also able to use the plan to provide additional incentive, making it an especially valuable arrangement. Benefits under this Company's plan are not limited to officers and a few highly paid persons; more than four hundred employees of this Company participate in the plan. Surely it is in the government's best interest, as well as that of these four hundred employees, to encourage financial planning such as that permitted by deferred compensation arrangements. The Proposed Regulation, however, would prevent such planning. Our plan which we have described and discussed has been in effect for more than eight years and is based on well established principles and widely recognized and accepted interpretations of existing tax law. Such principles and interpretations should not be negated by administrative change. We respectfully submit that the adoption of the Proposed Regulations, under which neither the Government nor any of the affected parties will benefit, is not warranted. Sincerely yours, MR. MICHAEL STERN, CHARLES A. MCLENDON, Executive Vice President. CALIFORNIA LEGISLATURE, Glendale, Calif., April 7, 1978. Staff Director, Committee of Finance, Dirksen Senate Office Building, Washington, D.C. DEAR MR. STERN: Enclosed are five copies of my Senate Joint Resolution 31 which has passed both houses of the California Legislature without a dissenting vote. The resolution passed the Senate on January 19, 1978 with a vote of 38-0. The bill passed the Assembly on April 6, 1978 with a vote of 76–0. I respectfully request that a copy of the resolution be included in the record of your March 15, 1978 hearing on S. 1587. If you need additional copies of the resolution, please feel free to contact me at the above address. Senate Joint Resolution No. 31-Relative to state and local government pension and retirement plans. LEGISLATIVE COUNSEL'S DIGEST SJR 31, as introduced, Russell (Rls.). Retirement and pension plans: state and local government. This measure urges the President and Congress of the United States to reiterate the intent in the Employment Retirement Security Income Act of 1974 that state and local government pension plans are not required to file annual returns and reports under that act. Vote: majority. Whereas, The Internal Revenue Service is interpreting Public Law 93-406, the Employee Retirement Income Security Act of 1974, as requiring all state and local government pension and retirement plans to file certain annual returns and reports provided for in ERISA; and Whereas, ERISA indicates a clear congressional intent that state and local government plans not be regulated or file returns as interpreted by the Internal Revenue Service; and Whereas. Such interpretation by the Internal Revenue Service threatens the integrity and future of state and local government pension plans by exposing them to potential tax on investment income, as well as the loss of deferred tax treatment granted beneficiaries of qualified plans; now, therefore, be it Resolved by the Senate and Assembly of the State of California, jointly, That the Legislature of the State of California respectfully memorializes the President and the Congress of the United States to reiterate the intent contained in the Employee Retirement Security Income Act of 1974 that state and local government pension and retirement plans are not required to file annual returns and reports under that act, and to cancel or refund any penalties imposed on such plans in the past for late filing or failure to file those returns or reports; and be it further Resolved, That the Secretary of the Senate transmit copies of this resolution to the President and Vice President of the United States, to the Speaker of the House of Representatives, and to each Senator and Representative from California in the Congress of the United States. STATEMENT OF LEONARD PREWITT, EXECUTIVE SECRETARY, TEACHER RETIREMENT SYSTEM OF TEXAS The National Council on Teacher Retirement (NCTR) supports legislation removing the threat of taxation on the income of public employee retirement funds, insuring that beneficiaries of public employee benefit plans are not burdened with excessive estate taxes, and reinforcing the decision of Congress in the Employee Retirement Income Security Act of 1974 (ERISA) that federal regulation of public pensions should be considered separate from the regulation of private pensions. The need for this legislation has arisen out of recent attempts of the Internal Revenue Service to use Section 401 (and related provisions) of the Internal Revenue Code to regulate pension systems maintained by state and local governments for their employees. Section 401(a) permits the qualification of certain pension, profit-sharing, and stock bonus plans for special tax treatment. The primary advantages of qualifying under Section 401(a) are that the employers contributions to the plan are deductable from his taxable income and that, under Section 501 (a), the earnings from investments of the plan's funds are exempted from the federal income tax. A plan may also be exempted from tax on investment income if it is an institution listed in Section 501 (c), such as an educational institution, fund, or foundation. Beneficiaries of pension funds qualifying under Section 401 (a) also receive certain income and estate tax advantages under Sections 101, 402, and 2039. Section 401 originally was clearly designed for private pension plans. For many years IRS considered the members and beneficiaries of public plans to be eligible for the same estate and gift tax treatment as employees under a private plan without the requirement that the public plan file the application for qualification under Section 401(a). Section 401(a) did not then and does not today satisfy the needs of public plans. When Congress first began to consider qualified retirement plans, not only the income of states and their subdivisions but also the salaries of their employees were considered non-taxable. Even now governmental revenues are not taxable, and, in the opinion of NCTR, neither are the earnings of state and local public pension funds. The only reason public pension systems now need to qualify their plans under Section 401 (a) is to provide their members and the beneficiaries of their deceased members with the same beneficial estate and income tax treatment on benefits that private sector employees enjoy. Section 401(a) standards for qualification generally prevent unequal treatment of classes of employees and, since 1974, provide an enforcement mechanism for ERISA requirements. Most, if not all, of these standards should have no applicability to public pension systems, especially in view of the funding resources for public plans, the constitutional protections for members which apply to public pension laws, and Congress's decision not to apply ERISA to public retirement systems. However, IRS has, in the opinion of NCTR, used Section 401 (a) to apply the provisions of ERISA to public plans. NCTR, therefore, supports enactment of separate, explicit amendments to the Internal Revenue Code which provide tax treatment of benefits from public retirement plans equal to that currently provided private employees who qualify under Section 401 (a). Any standards to qualify public systems for this favorable tax treatment should be tailored to the special characteristics of public plans, if Congress should eventually determine there is a need for such standards, and not on the standards of ERISA. Public plans do not have the same characteristics of private plans. Many public plans have qualified under Section 401(a). IRS has recently attempted to tax the investment income of public plans which have not qualified, reasoning that such plans are not exempt under Section 501 (a) and are therefore taxable. It is the opinion of NCTR that public retirement systems are state agencies not subject to federal tax, regardless of their qualification under Section 401(a) and exempt status under Section 501(a). In New York v. United States, 326 U.S. 572 (1946), United States Supreme Court stated: "A State may, like a private individual, own real property and receive income. But in view of our former decisions we could hardly say that a general nondiscriminatory real estate tax (apportioned), or an income tax laid upon citizens and States alike could be constitutionally applied to the State's capitol, its Statehouse, its public school houses, public parks, or its revenues from taxes or school lands, even though all real property and all income of the citizen is taxed." This holding was reaffirmed in National League of Cities v. Usery, 426 U.S. 833 (1975). However, since the IRS seems not to have the same understanding of the law, the NCTR believes the most effective way to resolve the issue is to have legislation which explicitly states that the income of such systems is not taxable. The IRS attempt to tax public systems may simply be the first step in an effort to force all public retirement systems to comply with ERISA standards through qualifying under Section 401 (a). Already, public plans desiring 401 (a) qualification are being required to file reports with IRS pursuant to Section 1031 of ERISA (Section 6058 of the Internal Revenue Code). This is in direct conflict with the stated intent of Congress to exclude public systems from the application of ERISA. The ironic result of an effort to enforce ERISA through Section 401(a) may be to endanger the retirement benefits of public employees. If public plans do not meet the requirements of Section 401 (a) as interpreted by IRS, public employee benefits stand to be reduced by the threatened taxation on the investment income of the public pension plan and by the full taxation applied to members and beneficiaries of a plan which does not qualify under Section 401(a). NCTR believes that federal regulation of public pensions, if such is needed, should await Congressional action on the recommendation of Congressionally mandated public pension studies. NCTR also feels that if such regulations are needed they should be administered by a pension commission and not IRS. Congress should prevent actions by federal agencies contradicting the explicit Congressional intent that public plans not be subject to ERISA. However, the IRS should not be allowed to apply overzealously legislative provisions for private pension plans to public plans, especially where the result can be adverse to the very people pension reform is designed to protect. NCTR supports legislation which extends the same tax treatment to retirement benefits for public employees that applies to those of private sector emplovees. NCTR also wants legislation which will unequivocally protect employee retirement funds from the threat of double taxation. NCTR will not object to any needed regulation of public pensions that is tailored specifically to the special characteristics of public retirement systems. Hon. JEROME KURTZ, TEACHER RETIREMENT SYSTEM OF TEXAS, Commissioner of Internal Revenue, DEAR MR. KURTZ: As a career state employee and member of the State of Texas deferred compensation plan, I strongly oppose Proposed Treasury Regulation § 1.61-16. I do not believe that the proposed rule is sound on either a revenue producing basis or equitable basis. Furthermore, I sincerely believe that the proposed rule exceeds your constitutional and statutory authority. As I read this proposed regulation, it will (contrary to Section 451 (a) of the Internal Revenue Code) treat amounts deferred from each payroll check as received and taxable to the employee at the time of deferral. Under the laws of the State of Texas the amount deferred cannot be received by the employee or his estate until either death or cessation of state employment. At the time it is received, it is fully taxable as well as any increase because of investment gain. The Legislature of the State of Texas in enacting statutory authorization relied on the provisions of the Internal Revenue Code, judicial interpretations thereof as well as previous rulings by your office. It was an attempt by the Legislature to grant to all state employees and teachers who are members of TRS the same opportunity to defer income that was previously limited to those teachers who were not members of the TRS. After this enactment, your office specifically approved the State of Texas deferred compensation plan which is administered by the Comptroller of Public Accounts, a State Constitutional Officer. The State of Texas deferred compensation plan did away with an inequity previously existing. Your office should not recreate this inequity without a rational basis for the discriminatory classification it attempts to create. Section 451 (a) of the Internal Revenue Code specifically provides that gross income is income for the taxable year in which received by the taxpayer. These amounts are prohibited by state law from being received by the employee or his estate before death or cessation of state employment. Your proposed rule is in direct violation of Section 451 (a) of the Internal Revenue Code and has been treated accordingly, not only by your office in the past but also by the courts. Under the definition of the cash method of accounting of income, Section 451 (a) of the Internal Revenue Code does not tax a individual when earned; rather it taxes a individual when the money is actually received either by actual receipt or by legally enforceable rights thereto (constructive receipt). Since the money is specifically prohibited from being received by state law, it is legally impossible for this to constitute a constructive receipt. Therefore, I respectfully submit that the proposed rule is in violation of and contrary to the Internal Revenue Code which not only grants but limits your statutory authority. In addition thereto, I respectfully submit that the proposed rule is in violation of the due process clause (as well as the Equal Protection Component) to the Fifth Amendment to the Constitution of the United States. If your proposed rule were an act of Congress, and Congress failed to repeal those provisions of the Internal Revenue Code specifically authorizing Pension and Profit-sharing plans, Keogh plans, Teacher Tax-Deferred Annuity plans and others, such an act of Congress would create a classification not permitted under the Fifth Amendment to the Constitution according to the United States Supreme Court decisions applying the Fifth Amendment to similar provisions. If Congress cannot create such a classification, I respectfully submit that you do not have the authority to do so. I do not propose to include a brief on your constitutional and statutory authority in regard to the proposed rule as I am aware that your legal staff is capable of doing so. However, I urge you to give careful consideration to the questions raised in this letter. Furthermore, as of this date I am unaware of any publication which outlines the reason why this proposed rule is desirable either from an administrative standpoint or a revenue producing standpoint. For this reason, as of now I can see no justification for the proposed rule. The Teacher Retirement System of Texas does not have a record of members of the teacher retirement system that are also members of the State of Texas Deferred Compensation Plan. However, we are aware that a number of individuals will be affected by your proposed rule in preparing for their retirement income. I want to thank you in advance for considering the matters contained in this letter. Yours very truly, JOHN REEVES. STATEMENT OF THE AD HOC COMMITTEE ON PUBLIC EMPLOYEE DEFERRED COMPENSATION PLANS Mr. Chariman and members of the Committee on Finance, I am here to represent the views of the Ad Hoc Committee on Public Employee Deferred Compensation Plans concerning nonqualified deferred compensation plans for public employees. Deferred compensation simply describes a situation where an employee is taxed upon income received during his retirement which is attributable to work he performed much earlier in life. Recent Treasury actions have cast 26-724-197811 |